Today's trading highlights the peril of trading USD/CAD on fundamentals.
The pair shot higher Friday on a strong US jobs report and a weak Canadian print. That made sense but here we are today one trading day later and back to where the pair started. Not only that, but oil is down 1.4%.
At times that's the day-to-day of trading FX. The market is struggling to price the path of rate hikes. I would also argue asymmetric risks are coming to the fore.
If the top of the rate hiking cycle means 2% overnight rates in Canada and the US, then it doesn't really make a difference to the performance of either economy. However if terminal rates are 3-4% the difference could be stark.
Surely that would put a strain on both economies but for Canada it would be fatal because of extremely high home prices and household debt.
It's also important to keep in mind that the most important thing for Canadian mortgage rates isn't the Bank of Canada -- it's the Fed. Canada's bond market -- like much of the world -- is whipped around by the Fed. So if the Fed is forced to over-tighten to control its own economy, then even if the BOC cuts rates, it could still pop the Canadian housing bubble in a disastrous way.
All that said, is the market suddenly cluing into that risk lately? Is that why CAD has failed to track the astonishing rise in oil and other commodities? No, I don't think that's the case. It's more about the flow of USD and the risk trade.
But if we do end up in a situation where inflation begins to runaway, there won't be any help from the loonie from commodities.
